Investor Relations and ESG

It’s a trend seen globally: investors are looking beyond financial statements for a more complete picture of how companies create long-term value not only for shareholders, but also for the greater society in which they operate.

Environmental, social and governance (ESG) impacts are becoming increasingly important factors in investment decision making, which in turn can directly affect share prices and bottom line financial performance.

Put simply, ESG performance has become a critical measure of company value and sustainability, which makes reporting against these measures essential business practice. More than 80 per cent of the world’s top economies by GDP in 2016 mandated ESG reporting in some form.

The chart below, from the UN Principles of Responsible Investment (UN PRI), shows the rapid growth of ESG related policies being introduced globally.

 

 

Considering the vast number of investment manager UN PRI signatories, each with teams of ESG analysts globally, it’s no wonder many developed markets integrate ESG reporting within their corporate reporting strategy.

However, the quality of these disclosures is often lacking, with many reports focused on meeting compliance requirements.

Reporting on ESG

Reporting on ESG performance is much more than a compliance exercise. When done effectively, these reports are a key communication tool to engage shareholders and investors. They reflect the company’s recognition of its responsibilities as a corporate citizen, benchmark its performance against peers, and demonstrate a commitment to increasing transparency and accountability.

A strategic approach to ESG embeds these values across company strategies, policies, communications and stakeholder engagement processes, and drives continual improvement in business practices to mitigate risks associated with ESG impacts.

However, ESG strategy and implementation shouldn’t only be considered as risk mitigation. An effective and engaged strategy will drive a range of stakeholder outcomes such as:

  • Improved communication: messaging, transparency and engagement with internal and external stakeholders is enhanced
  • Expanded investor base: access to long-term responsible investors is increased
  • Retention of current investor base: through assurance of management involvement and clarity of strategic vision
  • Increased brand value: improved perception of the brand by suppliers, clients, customers and employees aids retention and acquisition
  • Risk mitigation: risks are identified and control more adeptly allowing opportunities to innovate.

While there are many different ESG reporting frameworks (GRESB, GRI GSSB, CDP, SASB, IIRC) and it is easy to get confused, applying an ESG framework doesn’t need to be a complex process. Essentially it starts with understanding what investors are looking for from an ESG risk exposure perspective, and the strategic approach adopted by the company to address risks.

Investor Relations and ESG

Investor Relations (IR) holds a key role in holding this focus. IR must collaborate with stakeholders across the company to ensure its approach to ESG strategy and reporting integrates with investor demands, and is targeted to both internal and external stakeholder needs.

Specifically investor relations heads and managers need to:

  • Understand the ESG disclosure and reporting environment in which their company operates
  • Address ESG related disclosure and communication and ensure that they are engaging investors
  • Audit current ESG performance and benchmark the company’s level of disclosure against peers
  • Identify and implement strategies to improve the company’s ESG performance

The key objectives are to create positive social impact and business value, whilst ensuring shareholders needs are addressed. ESG application in the Australian market has been slow and undynamic in comparison to Europe, USA, and markets in Asia such as Japan and South Korea.

ESG reporting should be externally assured to provide investors with additional confidence in the report findings.

The diagram below, from Sustainable Accounting Standards Board (SASB) materiality assessment, depicts how ESG risk assessments are used in calculating share price performance. It clearly illustrates the impact of ESG risks and the importance of a strategic, integrated approach.

 

 

When choosing an ESG strategy, IR managers may benefit from looking at the European leaders in this space. One highlight recently mentioned to a colleague at the COP23 summit, was Finnish telecommunications business Elisa. The table of contents for their Annual Report shows how integrated ESG is across all their operations. There are clear and transparent communications throughout the report, describing the risk, outlining the impact assessment, and disclosing the strategy to address this.

Considering these challenges, IR should be actively engaged in leading ESG planning and ensuring companies understand and respond to the interest that both mainstream and responsible investors are showing with respect to ESG risks and disclosure. ESG is a material risk to any organisation, and should be treated similarly to corporate and annual reporting.

James Cronan